ABB India shares have outperformed the broader market, up 22%, in the past month compared with 1% gain for the BSE Capital Goods index. Photo: Reuters
A big relief from ABB India Ltd’s September quarter results was that order inflow has finally jumped significantly, compared with a decline seen in the last few quarters, as deferred orders were finalized during the quarter. Yet the stock fell around 0.8% after the earnings announcement.
Firstly, order intake grew slightly less than two-thirds to Rs.2,292 crore in the September quarter compared with the same period last year and compared with a decline in the past few quarters. True, this was a marked improvement. Unfortunately, it doesn’t indicate any recovery because it was due to deferred orders taken up during the quarter. The jump led to an increase in the order backlog to Rs.8,275 crore compared with Rs.7,956 crore at the end of the June quarter.
Secondly, net sales growth improved only marginally by 6.7% to Rs.1,969 crore compared with the June quarter. Slow growth in the revenue indicates that order execution continues to remain slow. During the conference call, the management said that it will take some more time to confidently say the situation is improving on the ground.
Industry capex is down and demand continues to remain tepid, which may have led to a decline in revenue for process automation, down 11% year-on-year (y-o-y) in the September quarter. Power systems sales were also down 12% because of weak pace of execution, according to analysts. Power systems and process automation contribute around a third to the company’s total revenue.
Overall, operating profit margin improved to 7.5% in the September quarter from 7.2% in the same period last year on the back of cost reduction due to a favourable product mix, decline in commodity prices and higher localization. As a result, net profit grew 31% y-o-y to Rs.58.7 crore. Growth in exports, which contribute around a sixth of the sales, has slowed to 12% compared with 15% growth in the previous quarters due to the global slowdown.
ABB India shares have outperformed the broader market, up 22%, in the past month compared with the 1% gain for the BSE Capital Goods index. The shares are trading at a price-to-earnings multiple of 62 for FY16 and have factored in the steep recovery in order inflow. With the management continuing to remain cautious and doubts over a sustained recovery, the share is more than richly valued.
The writer does not own shares in the above-mentioned companies.